How to Create an Audit Trail to Facilitate Review of Accounting Records - dummies

How to Create an Audit Trail to Facilitate Review of Accounting Records

By Kenneth Boyd, Lita Epstein, Mark P. Holtzman, Frimette Kass-Shraibman, Maire Loughran, Vijay S. Sampath, John A. Tracy, Tage C. Tracy, Jill Gilbert Welytok

An audit trail is a system to document and file evidence of your accounting transactions. A well-designed audit trail helps auditors conduct audits more efficiently in these three ways:

  • Enabling auditors to complete their work faster.

  • Increasing the auditor’s confidence in the company’s internal controls.

  • Reducing the amount of time auditors spend in the field with the client (which should reduce audit fees as well).

The audit trail also has benefits for your accounting staff. After all, accountants frequently need to find information on accounting transactions. Maybe a manager wants more information on a particular transaction. A review may be needed to correct an accounting error. An effective audit trail can save hundreds of hours of review time for your accounting staff, long before the auditors show up in your office.

The following sections explain some practical approaches for setting up an effective audit trail.

Using numbered forms

Any form you use frequently should be numbered at printing, just as checks from a bank are numbered. This includes invoices, purchase orders, and shipping documents, to name a few.

If each form has a number, every form that’s been used can be accounted for. For example, numbered invoices mean that each sale can be agreed (matched) to a specific numbered invoice. If a numbered invoice is missing, an accountant or auditor can review other documents to determine whether the sale is legitimate.

To verify the sale, an auditor may review shipping documents, which are also numbered. This system enables an auditor to test the concept of completeness, ensuring that every transaction has been properly recorded.

Maintaining a written procedures manual

Procedures manuals are critical, because they document how accounting transactions are recorded. If accountants or auditors want to review a transaction, the procedures manual shows them the steps in the process, so they have a better chance of finding what they’re looking for. One of the biggest challenges for a company is to maintain and update a procedures manual, because it’s so time-consuming and requires constant vigilance. Each time a process changes, your staff needs to stop and document the change.

Suppose you’re an auditor needing to audit cash. The procedures manual should tell you who performs the bank reconciliation and where those records are located. You should be able to find out which drawer the records are filed in and find the file path to get to the records online.

Cross-training accounting staff

Another important part of maintaining an audit trail is to cross-train employees on accounting tasks. Cross training offers several benefits:

  • Employee A can perform employee B’s accounting work when B isn’t in the office.

  • If A and B can perform the procedures, they can both explain the process to the auditors and help them pull accounting records.

  • If each accounting task can be performed by at least two people, auditors have an easier time getting help with any accounting issue.

A properly maintained procedures manual can help immensely with cross training, as well as dealing with situations in which an employee leaves the firm. Using the procedures manual, other members of the staff can fill in, and the replacement who’s eventually hired will have less trouble getting up to speed.

A logical system of record retention also speeds up the audit process. The goals of these tasks are to support the audit process and simplify the day-to-day accounting work.